Why Drive-Thru Locations Are So Important for Starbucks

In the video below, Motley Fool CEO Tom Gardner sits down with Starbucks (NASDAQ: SBUX) CFO Troy Alstead during a recent visit to Starbucks headquarters in Seattle. In this portion of the video, they discuss why drive-thru locations are important for Starbucks. Alstead says that 60% of new locations opened in the U.S. will have drive-thrus. Drive-thru locations realize higher margins for Starbucks, and allow the company to expand to different areas, such as off-highway locations.

A full transcript follows the video.

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Tom Gardner: Can you talk about drive-thru locations and what's happening there? The majority of your new store openings have drive-thru attached to them. They're higher margin and I'm curious, is this opening up new real estate opportunities, new locations for you as well? I mean, is this opening up highways and putting you more in the... just a bunch of scenarios that Starbucks... when people say Starbucks has already saturated the market, when you opened up drive-thru opportunities, it broadens your opportunities.

Troy Alstead: It absolutely does. And we are a long ways from saturation, by the way, that's clear to us. One of the things we learned in '08 when we had to close some stores and we had to trim the portfolio and really relook at what is the potential depth of penetration in the U.S., even before you think about outside the country, and how can we get to more of that coffee consumption? That opened our eyes up to we had to clean the portfolio up and then we have years and years and years of growth left in the U.S. And some of that, yes, will come from accessing real estate and real estate opportunities that perhaps we couldn't have got to quite so easily before. Innovative designs, different footprints, depth of penetration. We understand trade areas better than we ever have before, and yes, drive-thrus are an important part of that. We have fantastic economics through our drive-thrus. We're providing a great experience to our customers who are on the go, they're moving fast, they want that ability to stay in their car and experience Starbucks at the same time.

We have about 40% of our U.S. store base today as drive-thrus. But going forward, about 60% of the new stores we'll open are drive-thrus, to your point. It's about accessing real estate and intercepting traffic and providing customers more access. It allows us to get to some off-highway kinds of locations, for example, that perhaps a stand-alone cafe wouldn't work so well in. It allows us to get to some of the remote areas around the country, and frankly, coffee is so much a part of people's daily lives that we have ways to access that experience through our stores to sustain us for a long time

Tom: Would you say that 40% existing locations that have drive-thrus, the max number of drive-thrus for existing Starbucks locations, have you pretty much maxed out the number of drive-thrus you can add to the stores that you already have?

Alstead: Are you referring to in our existing base of stores that don't have a drive-thru?

Tom: In your existing base of stores that don't have a drive-thru, have you pretty much added the ones that...

Alstead: I would say fundamentally yes. I have no doubt that among that base of stores that don't have a drive-thru, there will be some here and there that allow us over time. Sometimes it may be negotiations with the landlord to be able to add it in, lots of considerations that can go into that, but for the most part, new drive-thru opportunity is really new stores that will open from here.

Tom: And drive-thru internationally? Is that going to be, 60% of them will be drive-thrus someday, or you don't know?

Alstead: Well, we don't know that yet. The U.S. is more of a mature drive-thru market than most places around the world, so the opportunity is bigger and more immediate here. We are finding opportunities outside of the U.S. to deliver the same kinds of economics and the same kinds of traffic patterns with the drive-thru. It'll be a little slower. We're going to learn our way through that, but there's opportunity.

Tom: Where does the idea come from to create a drive-thru inside of Starbucks? Is that just one location that says, "Hey, let's see if we can test this concept here?" The idea gets pitched through an innovation group or how does that one bubble up?

Alstead: An idea like that one goes all the way back to the '90s. I mean literally not long after the IPO we had no drive-thrus across the system yet. But people kept asking, "When are you going to add drive-thrus?" Of course, looking at what other concepts have done and understanding the great economics that others have in that space, we've been asked from outside the company and inside the company for years. So there was probably years in the '90s where there was increasing opportunity, and to some extent pressure from time to time to say, "Why don't we try a drive-thru?"

We held back for a while. We wanted to make sure that when we launched a drive-thru, we could do it effectively, that we could provide the kind of experience that we want to, to our partners at the window, to the customers driving through the line, those had to happen before we could get ourselves to the place of opening a drive-thru.

We finally did that in the '90s and have been steadily growing them since, as we've recognized that the economics to our shareholders are fantastic, the experience to our customers are fantastic, it's just a win all around.

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